Understanding Office, Retail, Warehouse, and Industrial Leases: A Guide for Tenants and Landlords

Posted by: kevensteinberg
Category: Business Law

Commercial leases can be much more complicated than traditional lease agreements, and people will need to be aware of several important provisions relating to these kinds of documents. A commercial lease will typically be an agreement between a person or entity that is the tenant or lessee and a property owner who is the landlord or lessor. 

Almost every single aspect of a commercial lease is going to be negotiable, meaning that people should not hesitate to seek the agreement that will be most favorable to them. Every single person should be sure to read an entire lease agreement because there can be unfavorable terms hidden within some leases, and tenants should also ensure that a landlord or lessor does in fact actually own the property in question, and you will want to have a Los Angeles small business attorney on your side whenever you are negotiating a commercial lease.

Kinds of Commercial Leases

Most commercial leases will be categorized based on their payment terms. The two categories of payments are typically net or gross leases.

Under a net lease, a tenant not only pays a fixed rent amount but also covers certain associated costs such as taxes, insurance, and maintenance.  A triple net lease (also known as a net-net-net or NNN lease) may include management fees paid directly to a landlord.

With a gross lease, the tenant only pays their rent. The landlord will assume all costs relating to ownership of the property.

Gross leases will be much more common in residential leases but not as common in commercial leases. Some gross leases may be classified as modified gross leases or base year leases under which landlords are responsible for maintenance costs relating to property during an initial term but a tenant begins to assume costs over time.

The terms of a commercial lease are often based on the term, or the length of time a lease will last, and the rent, or the money a tenant pays a landlord to use property. Rent may fall into one of three categories:

  • Base rent or minimum rent — Monthly payment of a fixed amount by a tenant
  • Additional rent — A tenant’s contribution towards the costs of owning and operating property that is not a fixed amount
  • Percentage rent — A landlord’s right to recover a portion of their tenant’s sales or profits arising from the lease agreement

Many commercial leases can also involve security deposits, with tenants being required to pay up to six months rent as a security deposit. Under California Civil Code § 1950.7, a landlord must return any excess deposit amount to a tenant no later than 30 days from receiving possession of the property, and they are prohibited from applying a security deposit toward a defaulting tenant’s future rent obligations, unless there is a written agreement to the contrary.

Assignments and Subletting

A tenant’s interest in a commercial lease is their right to possess property, and a sublease will be a tenant’s transfer of less than the entire interest it owns in a property, while an

assignment will be a transfer of a tenant’s entire interest. With a sublease, a tenant will allow another party or subtenant to occupy some or all of the property, and the subtenant will pay rent to the tenant with the tenant paying rent to the landlord. 

If a subtenant breaches a sublease, the tenant has the right to re-take possession of the portion of the property that was subleased. For assignments, a tenant transfers to another party, the assignee, its entire interest in the property. 

Unless a lease expressly forbids these actions, a tenant has the right to assign the lease or to sublet. Many leases contain restrictions against these transactions, with the most common often being that no sublease or assignment can be concluded without a landlord’s prior consent. 

For a sublease, a tenant will remain liable for its obligations under a lease. This means that whether a tenant receives rent from a subtenant, the tenant is still responsible for the payment of rent to the landlord. A tenant will also retain liability for obligations under the lease after an assignment. 

An original tenant is a surety for the obligations of the assignee. When an assignee breaches the lease, the original tenant is the liable party.

To avoid conflicts between a tenant and a landlord over what a tenant is allowed and not allowed to do on property, landlords often prefer that commercial leases contain specific, limited use clauses forbidding any use other than what is specifically authorized. Tenants will prefer to have permitted uses provided in broad terms, so there is greater flexibility with their operations and also makes it easier to attract prospective subtenants or assignees. 

Contact Our Los Angeles Small Business Attorney

Did you need help negotiating a commercial lease in California? You will want to get in touch with Steinberg Law because we have a wealth of experience helping all kinds of clients with these types of cases.

Our firm handles many kinds of real estate cases. Call (818) 855-1103 or contact our Los Angeles small business attorney online to set up a free consultation.

Author: kevensteinberg